You Are Given the Following Data Assume That a Highly Liquid Market Does Not Exist for c

question 62

Multiple Choice

You are given the following data:
$\begin{array} {| l | c | } \hline r ^ { * } = \text { real risk-free rate } & 4 \% \\\hline \text { Constant inflation premium (IP) } & 7 \% \\\hline \text { Maturity risk premium (MRP) } & 1 \% \\\hline \text { Default risk premium for AAA bonds (DRP) } & 3 \% \\\hline \begin{array} { l } \text { Liquidity premium for long-term Treasury } \\\text { bonds (T-bonds) (LP) }\end{array} & 2 \% \\\hline\end{array}$
Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the rate on long-term Treasury bonds is _____.

• A)23 percent
• B)11 percent
• C)14 percent
• D)19 percent
• E)27 percent

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Definitions:

Common-Size Statement

A common-size statement is a financial statement in which each line item is expressed as a percentage of a certain figure for the purpose of comparison and analysis, such as revenues in an income statement.

Financial Positions

The status of an individual's or organization's assets, liabilities, and net worth at a specific point in time.

Liquidity

The ease with which an asset, or security, can be converted into ready cash without affecting its market price.

Financial Statements

Formal records of the financial activities and position of a business, person, or other entity.